public utilities commission - wordpress.com · 01.04.2010 · before the public utilities...

STATE OF CALIFORNIA ARNOLD SCHWARZENEGGER, Governor

PUBLIC UTILITIES COMMISSION 505 VAN NESS AVENUE SAN FRANCISCO, CA 94102-3298

December 21, 2010 Agenda ID #10061 Ratesetting TO PARTIES OF RECORD IN APPLICATION 09-12-002 This is the proposed decision of Administrative Law Judge (ALJ) Maryam Ebke. It will not appear on the Commission’s agenda sooner than 30 days from the date it is mailed. The Commission may act then, or it may postpone action until later. When the Commission acts on the proposed decision, it may adopt all or part of it as written, amend or modify it, or set it aside and prepare its own decision. Only when the Commission acts does the decision become binding on the parties. Parties to the proceeding may file comments on the proposed decision as provided in Article 14 of the Commission’s Rules of Practice and Procedure (Rules), accessible on the Commission’s website at www.cpuc.ca.gov. Pursuant to Rule 14.3, opening comments shall not exceed 15 pages. Comments must be filed pursuant to Rule 1.13 either electronically or in hard copy. Comments should be served on parties to this proceeding in accordance with Rules 1.9 and 1.10. Electronic and hard copies of comments should be sent to ALJ Ebke at [email protected] and the assigned Commissioner. The current service list for this proceeding is available on the Commission’s website at www.cpuc.ca.gov. __/s/ CHARLOTTE TERKEURST for__ Karen V. Clopton, Chief Administrative Law Judge KVC:jyc Attachment

F I L E D12-21-1003:06 PM

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ALJ/MEB/jyc DRAFT Agenda ID #10061 Ratesetting Decision PROPOSED DECISION OF ALJ EBKE (Mailed 12/21/2010) BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Application of Pacific Gas and Electric Company for Approval of the Manzana Wind Project and Issuance of a Certificate of Public Convenience and Necessity (U39E).

Application 09-12-002

(Filed December 3, 2009)

DECISION DENYING A CERTIFICATE OF PUBLIC CONVENIENCE AND NECESSITY FOR THE MANZANA WIND PROJECT

A.09-12-002 ALJ/MEB/jyc DRAFT

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TABLE OF CONTENTS

Title Page

DECISION DENYING A CERTIFICATE OF PUBLIC CONVENIENCE AND NECESSITY FOR THE MANZANA WIND PROJECT............................................. 1 1. Summary.................................................................................................................... 2 2. Background................................................................................................................ 4 3. The Proposed Project ............................................................................................... 6 4. Procedural History ................................................................................................... 6 5. Reasonableness of the Proposed Manzana Wind Project................................... 8

5.1. Resource Need and Diversity ........................................................................ 9 5.1.1. Parties’ Positions ............................................................................................ 9 5.1.2. Discussion ....................................................................................................... 9

5.2. Project Viability Risk ..................................................................................... 11 5.2.1. Parties’ Positions .......................................................................................... 11 5.2.2. Discussion ..................................................................................................... 12

5.3. Manzana’s Cost Comparison ....................................................................... 15 5.3.1. Parties’ Positions .......................................................................................... 15 5.3.2. Discussion ..................................................................................................... 18

6. Other Issues ............................................................................................................. 23 7. Comments on Proposed Decision ........................................................................ 23 8. Assignment of Proceeding .................................................................................... 24 Findings of Fact ............................................................................................................. 24 Conclusions of Law....................................................................................................... 24 ORDER ........................................................................................................................... 25


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DECISION DENYING A CERTIFICATE OF PUBLIC CONVENIENCE AND NECESSITY FOR THE MANZANA WIND PROJECT

1. Summary

This decision rejects the application of Pacific Gas and Electric Company

(PG&E) for approval of and issuance of a certificate of public convenience and

necessity for the Manzana Wind Project. PG&E’s application seeks authorization

to acquire, develop, and construct the Manzana Wind Project as utility-owned

renewable generation and to recover the $911 million costs of the Manzana Wind

Project in rates.

We reject the application because we find that the Manzana Wind Project

is not cost-competitive and poses unacceptable risks to ratepayers. We find that

the proposed cost of the Manzana Wind Project is significantly higher than other

resources PG&E can procure to meet its RPS program goal. Moreover, it will

subject the ratepayers to unacceptable risks due to potential cost increases

resulting from project under-performance, less than forecasted project life, and

any delays which might occur concerning transmission upgrades and

commercial online date. As a proposed utility-owned generation project,

ratepayers would pay a lump sum cost rather than a performance based cost for

the Manzana Wind Project. Therefore, ratepayers would be at risk if the project

underperforms. In particular, if the Manzana Wind Project fails to achieve

production as expected for any reason such as construction delays or

curtailments as a result of a collision with a California condor,1 shareholders face

no risks while customers could incur increased costs. In contrast, under a power

1 The California condor is an endangered species under both State and Federal law and is fully protected under State law.


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purchase agreement, project owners rather than ratepayers bear the risk of

project performance.

The Commission also finds it unreasonable to approve PG&E’s application

because PG&E has not made an adequate showing of need to support its

application. For example, there is no demonstration that the Manzana Wind

Project is needed to meet reliability or forecasted electrical demand of PG&E’s

customers. There is also no demonstration that utility ownership of this project

is needed to meet PG&E’s California Renewables Portfolio Standard (RPS) goals

or that this project is needed as a hedge against the development risks of other

projects in PG&E’s current RPS portfolio.2 There is also no showing of a gap in

the market for wind projects that must be filled by utility-owned projects to

otherwise justify this application.

In short, although the project would contribute to the California renewable

generation goals, given the availability of other lower-priced renewable projects

in the competitive market that could impose far less risks on ratepayers, PG&E

has failed to demonstrate a need for this project.

While we support clean, renewable generation and the development of

utility-owned renewable generation in the utility’s resource mix, approval of

PG&E’s application will not further Commission policies relating to utility-

owned generation of renewable resources given the lack of a showing of a need,

and the risks and costs the application poses to ratepayers.

2 The RPS was established in 2002 under Senate Bill (SB) 1078, Stats. 2002, ch. 516, and accelerated in 2006 under SB 107, Stats. 2006, ch. 464.


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2. Background

On December 3, 2009, Pacific Gas and Electric Company (PG&E) filed this

application seeking Commission authorization to acquire, develop and construct

the Manzana Wind Project and recover the associated costs in rates. Specifically,

PG&E requests the Commission to:

Grant a Certificate of Public Convenience and Necessity (CPCN) authorizing PG&E to construct the Manzana Wind Project, including a 246 megawatt (MW) wind facility and an approximately six-mile generator interconnection transmission line(Gen-tie);

Determine, pursuant to Section 1005.5 (a) of the Public Utilities Code,3 that the maximum reasonable and prudent cost for the Manzana Wind Project is $911.0 million;

Approve a prudent initial capital cost estimate of $911.0 million for the Manzana Wind Project;

Adopt an estimated annual revenue requirement for the Manzana Wind Project’s first year of operations equal to $131.8 million;

Authorize PG&E to recover in rates the actual costs of the Manzana Wind Project up to the Commission-adopted prudent initial capital cost estimate without the need for an after-the-fact reasonableness review and, if actual costs exceed the prudent initial capital cost estimate, allowing recovery of the excess costs above the estimate only following submission of a separate application and upon a Commission finding of reasonableness;

Adopt the initial three-year forecast of operation and maintenance (O&M) expense for the Manzana Wind Project;

Authorize PG&E to update the Manzana Wind Project’s initial capital cost and initial O&M estimate for (1) cost increases associated with monthly delays in commercial operations beyond

3 All section references are to the Public Utilities Codes unless otherwise indicated.


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December 31, 2011, (2) operational enhancements pre-approved by the Commission via an expedited advice letter process; (3) reductions in the revenue requirement if the final project size is less than 246 MW; and (4) revisions due to new or modified regulatory requirements, change in law or force majeure events to the extent pre-approved by the Commission via an expedited advice letter process;

Authorize revisions to the initial revenue requirement for (1) updated revenue requirement factors to reflect the then-current cost of capital, franchise and uncollectibles, and property tax factors; (2) finance costs for transmission upgrades, if required; and (3) changes in or expiration of renewable tax credits, including if the project is delayed beyond the December 31, 2012 operations deadline for federal tax credits;

Establish a Manzana Wind Project memorandum account to track the difference in the initial revenue requirement adopted in the proceeding and the actual revenue requirement based on the actual capital cost and authorizing transfer of the Manzana Wind Project memorandum account balance to the Utility Generation Balancing Account (UGBA) for recovery in the next Annual Electric True-up (AET) following commercial operation;

Adopt a non-bypassable charge to recover stranded costs over a 10-year period or, alternatively, for the period adopted by the Commission for utility-owned generation following implementation of Senate Bill 695 (Stats. 2009, ch. 337);

Authorize PG&E pursuant to § 851 to sell the Manzana Wind Project back to Iberdrola Renewables under certain circumstances; and

Grant such other relief as is necessary to effectuate the Application and issuance of a CPCN.

Division of Ratepayer Advocates (DRA), the Greenlining Institute, and

The Independent Energy Producers Association filed protests and responses to

PG&E’s application.


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3. The Proposed Project

The Manzana Wind Project is a proposed wind project in the Tehachapi

region in Kern County, California. The project was initially offered to PG&E in

the 2005 Renewables Portfolio Standard (RPS) Request For Offers (RFO) as a

power purchase agreement (PPA) by Iberdrola Renewables, Inc. (Iberdrola), the

current project owner. In 2009, after delays due to transmission issues and the

economic downturn, Iberdrola offered to sell the Manzana Wind Project to

PG&E. PG&E and Iberdrola began negotiating and reached an agreement on the

sale of the project in December 2009.

To acquire the project, PG&E has signed a Purchase and Sale Agreement

(PSA) with Iberdrola Renewables. PG&E has also negotiated and will sign a

Project Completion Agreement (PCA) with an affiliate of Iberdrola Renewables,

PPM Technical Services, Inc. (PPM Technical Services), which will obligate PPM

Technical Services to finish project development and then to construct the project

on PG&E’s behalf. Under the terms of the PCA, PG&E will be responsible for

permitting and constructing the Gen-tie from the Manzana Wind Project to the

proposed Southern California Edison (SCE) Whirlwind Substation.

While PG&E seeks a CPCN authorizing 246 MW as the maximum project

capacity, Iberdrola has obtained local development permits and land leases, and

secured turbines sufficient for only a 189 MW project. Thus, ultimately, the

capacity of the Manzana Wind Project may be less than 246 MW. PG&E expects

the Manzana Wind Project to be operational by December 2011.

4. Procedural History

The Commission held a prehearing conference (PHC) on October 7, 2008.

Following the PHC, the assigned Commissioner issued a Scoping Memo and


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Ruling (Scoping Memo) on March 25, 2010, which established the scope of issues

and the schedule for the proceeding.

The Scoping Memo set forth six issues to be examined as follows:

Environmental Review: as established under California Environmental Quality Act Guideline Section 15096;

Resource need and diversity;

Adequacy and thoroughness of the independent evaluation;

Cost;

Cost recovery mechanism; and

Utility ownership of a facility previously bid in a solicitation.

The Scoping Memo required that “[e]very party shall jointly prepare a

Case Management Statement and Settlement Conference Report.”4 The Scoping

Memo also directed PG&E to file and serve this report on behalf of all parties

after the final settlement conference.5

The Scoping Memo required all active parties in this proceeding who serve

written testimony, or intend to cross-examine witnesses at the evidentiary

hearing to participate in at least one mandatory settlement conference and jointly

prepare a Case Management Statement and Settlement Conference Report

identifying the following:

Any settled or otherwise stipulated issues.

All remaining contested issues.

Pursuant to the Scoping Memo, on May 21, 2010, PG&E filed the Case

Management Statement and Settlement Conference Report (Report) on behalf of

4 Scoping Memo at 2. 5 Scoping Memo at 3.


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The Utility Reform Network (TURN), DRA and PG&E. The Report provided a

list of contested issues for this proceeding.

Parties served testimony and rebuttal testimony pursuant to the schedule

established in the Scoping Memo. Evidentiary hearings were held on May 24

through May 26, 2010. DRA, PG&E and TURN filed opening briefs on June 18,

2010 and reply briefs on July 2, 2010.

5. Reasonableness of the Proposed Manzana Wind Project

PG&E claims the Manzana Wind Project is a cost competitive and highly

viable project that will contribute to meeting California’s RPS goals.

DRA and TURN oppose the application, arguing that the project does not

offer ratepayer benefits and is not cost competitive compared to other resources.

Furthermore, they argue that the Manzana Wind Project could cost even more

due to potential delays in completion of transmission connection and achieving

the expected commercial operation date. DRA and TURN are concerned that the

costs of any delays will be borne entirely by ratepayers through a higher revenue

requirement and an increased levelized cost of energy (LCOE) over the project

life. They also believe there is the risk of project operation curtailments in the

event a California condor collides with the project. Thus, DRA and TURN

recommend rejecting the application.

As set forth in the Scoping Memo, a threshold issue is whether there is a

need for this facility and the energy it may produce pursuant to § 1001 and

General Order (GO) 131-D Section VIII,6 and consistent with the intent of the RPS

6 GO 131-D implements § 1001 et se. with respect to electric generation, transmission, and distribution facilities. (GO 131-D, Section I)


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legislation. We address this issue first. Because much of the data regarding the

project cost and RPS solicitation information have been identified as confidential,

this decision specifically mentions only the non-confidential material but

considers the entire record.

5.1. Resource Need and Diversity

5.1.1. Parties’ Positions

PG&E claims the Manzana Wind Project will contribute significantly

toward meeting California’s 20% RPS goal. According to PG&E, assuming a

31.1% wind capacity factor, a 246 MW project would represent 670 gigawatt-

hours (GWh) annually, which would account for approximately 0.8% of PG&E’s

20% RPS goal. Under an expanded renewable goal of 33% by 2020, PG&E asserts

deliveries from the Manzana Wind Project will continue to play an important

role in meeting this expansion.

5.1.2. Discussion

We find that PG&E has not made an adequate showing of need to support

authorization of its application.

PG&E’s only justification of need for the project is limited to the statement

that the project is highly viable and can contribute to PG&E’s 20% RPS goal.

PG&E states “If project development continues on schedule, the project will be

online as early as December 2011, and bolster California’s efforts to meet state

current 20% RPS goals.”7 PG&E also contends “There are few highly viable

renewable projects of this magnitude that can be operational within this

7 PG&E application at 6.


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timeframe.”8 These statements alone, however, are insufficient to justify the

need for the project.

The Scoping Memo required that the Commission must determine

whether there is a need for this facility and for the energy it may produce.

Specifically, the Scoping Memo established that “This includes an analysis of

whether there is a need for this facility and for the energy it may produce

consistent with the intent of the California Renewables Portfolio Standard

Program legislation (Pub. Util. Code § 399.11).”9 PG&E has failed to provide any

analysis to support the need for this project. For example, PG&E has not claimed

that it will not meet its 20% RPS goals without the Manzana Wind Project or that

Manzana is needed as a hedge against the development risks of other projects in

PG&E’s current RPS portfolio. There is also no demonstration that the Manzana

Wind Project is needed to meet reliability or forecasted electrical demand of

PG&E’s customers. Moreover, there are serious concerns with the claimed

viability of the Manzana Wind Project due to the needed transmission upgrades

and the presence of California condors in the area, as discussed below. While we

conclude that the application is deficient in justifying the need for the project, we

do not reject it solely on that ground. Nor do we conclude that rejection of this

application suggests that PG&E should not procure additional renewable

resources for RPS compliance. That determination needs to be made in the RPS

proceeding. We are merely concluding here that PG&E has not produced

evidence showing that the Manzana Wind Project, as proposed in its application,

8 Exhibit 1-C at 1-4. 9 Scoping Memo at 4.


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is needed. As discussed below, we also conclude that the Manzana Wind Project

is not cost-competitive and poses unacceptable risks to ratepayers.

5.2. Project Viability Risk

PG&E claims the Manzana Wind Project is highly viable due to several

factors, including its transmission status. PG&E expects the Manzana Wind

Project will be developed according to the proposed schedule and fully

operational as early as December 2011 after several new transmission facilities

are constructed to allow the project to be connected and deliver power to the

grid. The transmission requirements include:

Construction of Whirlwind Substation, a new substation which will be constructed by SCE and interconnect to SCE’s Tehachapi Renewable Transmission Project (TRTP).

A new six-mile Gen-tie that will be constructed by PG&E to connect the Manzana Wind Project to the Whirlwind Substation.

Looping the existing Midway-Vincent #3 line, which will be part of segment 4 of SCE’s TRTP, into the Whirlwind Substation to allow power to be delivered from the Manzana Wind Project to the grid.


PG&E asserts there is no risk of transmission delay because the above

projects are well along in the development process and have a high probability

of being completed on time.10 In addition, PG&E states that it has an updated

interconnection plan that will enable the looping of the existing Midway-Vincent

#3 line to be completed according to the schedule. DRA and TURN have a

different view of the project timetable and are not as optimistic as PG&E about

10 PG&E Opening Brief at 31.


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the transmission completion and the project online date. TURN’s primary

concern is with the expected completion date of the Whirlwind Substation.

TURN also questions the projected completion date for Segment 4 of the TRTP.

TURN is also troubled by the evolving new information and updated schedules

for PG&E’s assumptions and cautions the Commission that there is a real risk of

delay associated with the interconnection of the project given the above

uncertainties.11 Both TURN and DRA express a concern that a delay in the

completion of the required transmission interconnection will increase project

costs to the ratepayers.

5.2.2. Discussion

As a proposed utility-owned generation project, ratepayers will pay a

lump sum cost rather than a performance-based cost for the project. Thus,

ratepayers are directly impacted by events that can result in lower than expected

generation, including delays, under performance, or shut down (for example,

due to a California condor collision) of the Manzana Wind Project which can

increase the project’s levelized cost of energy. In contrast, under a PPA, project

owners rather than ratepayers assume the risks for project production.

We conclude that there is significant risk that the Manzana Wind project

may be subject to transmission delays and project curtailments. We do not

believe it is reasonable for ratepayers to assume such risks.

First, we agree with TURN and DRA that a significant risk of delays exists

even with the proposed updated alternative interconnection plan. Although

PG&E asserts confidence that the Manzana Wind Project will achieve

11 TURN Opening Brief at 5.


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commercial operation in December 2011, DRA’s confidential brief argues why

PG&E’s proposed transmission interconnection schedule is unrealistic given the

environmental review and the approval process required for the proposed

interconnection plan. Specifically, DRA shows that the Whirlwind Substation

completion date is not reasonable in light of the possibility that the United States

Fish and Wildlife Service may conduct a risk assessment on the effects of future

Tehachapi wind projects on the California condors as part of its review. TURN

also demonstrates that there is a risk of delay associated with the interconnection

of the project due to the projected completion date for Segment 4 of the TRTP.12

PG&E fails to provide a satisfactory response as to why its transmission

projections are accurate and reliable in light of these potential outcomes.

In addition to the risk of potential transmission delay, the operational

viability of the Manzana Wind Project may also be at risk due to the potential

death or take of a California condor.

DRA argues that the California Department of Fish and Game considers

the loss of condor a significant issue and may require partial or complete shut

down of the Manzana Wind Project operation if such a loss occurs. DRA

contends that the condor population will likely increase over the life of the

project and does not believe PG&E’s proposed mitigation measures with respect

to redesign of the project are adequate to reduce such a risk. In response, PG&E

asserts that it is unlikely that condors will move into the area even as their range

expands. According to PG&E, the project site lacks the elevation that California

condors typically use for flying in the area. Furthermore, PG&E states it has

12 TURN Opening Brief at 5.


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eliminated the wind turbines on the highest elevation that could possibly be

close to the area where condors fly. Thus, PG&E contends it is highly unlikely

that a condor will collide with the project. PG&E also argues that California

Department of Fish and Game has not appeared in this proceeding to express

any concern about the Manzana Wind Project’s potential impact on condors.13

Nonetheless, while PG&E minimizes the potential of condor fatality, PG&E

seems to agree that project modifications including project shutdown are

potential legal remedies available to California Department of Fish and Game in

case there is a condor collision.14

We agree with TURN and DRA that even with the redesigned turbine

locations and other proposed mitigation measures to deter condors from the

project site, it is possible that California condors could be present in the site in

the future. The California condor population is expected to increase during the

life of the project and even if condors are not attracted to the site today, they may

be in the future given their increased population and the need to increase their

foraging area, which could include the project site.15 In addition, as a PG&E

witness testified, “These are wild animals, and I can’t predict what they will

13 PG&E Opening Brief at 50. We note, however, that while the California Department of Fish and Game has not actively participated in this proceeding, on October 25, 2010, it sent a letter to the Commission raising several concerns with the Manzana Wind Project and the possibility of California condors colliding with the operating wind turbines. Specifically, the California Department of Fish and Game’s letter states “the Department has concluded that condors are likely to utilize the Project site and may be at risk of colliding with wind turbines” and “operating wind turbines at this location risks ‘take’ of California condor.” (October 25, 2010 letter from The California Department of Fish and Game, at 1-2 in correspondence file of this proceeding.) 14 PG&E Opening Brief at 49. 15 DRA Opening Brief at 5.


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do.”16 Furthermore, the effectiveness of PG&E’s other proposed mitigation

measures to deter condors from the project site is speculative at this point. Given

that California condors could be present in the project site, the risk of project

shut down or curtailment as a result of condor fatality exists. These risks, even if

unquantifiable at this point, present a serious concern. We cannot ignore the

risks and the potential impact of condor fatality on project operations and

economics. We conclude it is not reasonable for ratepayers to assume such risks.

5.3. Manzana’s Cost Comparison

The Scoping Memo requires the Commission to determine whether

Manzana’s proposed capital cost and operating costs are reasonable and

competitive with other similar renewable wind resources, i.e. whether the project

costs, on both a net present value and levelized cost basis, are reasonable in

comparison to other relevant projects.17


PG&E compares the Manzana Wind Project’s net market value to the net

market values of current and recent renewable projects from its 2009 RPS RFO

and long term RPS contracts filed within 12 months of the submittal of the

Manzana application. PG&E asserts the net market value is the most appropriate

approach for evaluating the Manzana Wind Project because it captures the

differences in value related to when and where energy is delivered and allows

16 Recorder’s Transcripts at 350. 17 See also § 1005.5 where, when the Commission grants a CPCN for new construction estimated to cost greater than $50 million, the Commission must specify a certain maximum cost “determined to be reasonable and prudent.”


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for comparison across renewable technologies.18 Based on this approach, PG&E

asserts the Manzana Wind Project is cost competitive, because it ranks high

among the selected renewable projects. PG&E also contends that the Manzana

Wind Project ranks high among just wind projects. PG&E does not provide any

analysis using the LCOE approach as directed by the Scoping Memo.

TURN and DRA disagree with PG&E’s assessment and express several

concerns with PG&E’s underlying assumptions and the approach in evaluating

the project’s cost competitiveness. To begin, they argue that the net market value

approach should not be used to compare the Manzana Wind Project to other

projects because net market value does not provide an apples-to-apples

comparison for projects. They believe that comparing the LCOE of projects is a

better approach.

Furthermore, they believe the Manzana Wind Project should be evaluated

against only wind projects not all other renewable technologies. In addition,

they argue all wind projects that are shortlisted as part of the PG&E’s 2009 RPS

solicitation should be included in the comparison. Finally, they argue that

PG&E’s cost comparison should take into account the cost impact of several

optimistic assumptions that, if not materialized, will result in even higher costs

for Manzana.

TURN believes PG&E’s use of net market valuation is flawed because it

assesses projects executed at different times, with dissimilar contract or

ownership duration, different online dates, and different forward energy and

18 PG&E Opening Brief at 19.


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capacity forecasts.19 According to TURN, each of these factors introduces

potential bias that could impact the net market value calculation and skew the

results. In TURN’s view, PG&E’s approach is deficient and the Commission

should not use it to determine the cost competitiveness of Manzana. Instead,

TURN recommends we use the time of day adjusted LCOE to compare projects

coming on line within similar time horizons.

DRA opposes PG&E’s proposed net market value approach as the primary

benchmark for determining cost reasonableness, because in its view, the net

value approach relies on uncertain forecasts and does not provide an apples-to-

apples benchmark for comparing offers for renewable projects. DRA

recommends we use the LCOE because in its view, the LCOE “is a better,

simpler, more transparent benchmark.”20

DRA is also concerned that the use of the net market value approach in

determining cost reasonableness would create inconsistencies among utilities to

the extent their evaluation methodologies differ. For example, DRA contends

that PG&E’s net market value approach is different from other utilities because it

uses a time of delivery profile and a proprietary forward price curve to

determine a market value of the bid. DRA, therefore argues that using “each

utilities’ unique least cost best-fit methodologies will not produce a transparent

or consistent test for assessing cost reasonableness.”21 DRA urges the

Commission to “adopt an approach to evaluating cost reasonableness that can be

19 TURN Opening Brief at 14. 20 DRA Opening Brief at 44. 21 DRA Opening Brief at 44.


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applied to other California investor-owned utility applications for utility owned

renewable generation.”22

TURN and DRA are also concerned about several key assumptions made

for Manzana. DRA and TURN challenge the accuracy of some of PG&E’s

assumptions and argue that a number of PG&E’s estimates are too optimistic and

if not materialized, could significantly impact the economics of the projects and

the project’s ranking. For example, they argue assumptions including project

performance, the 30-year project lifespan, commercial on line date, and operating

costs are unreliable and could yield to higher costs for the Manzana Wind

Project, making the project even less economical. They recommend we discount

these assumptions in determining the cost effectiveness of the Manzana Wind

Project.

In response to the methodology used to compare the Manzana Wind

Project to other projects, PG&E claims that LCOE does not reflect the value of

energy to customers. PG&E contends that the LCOE must be compared to

forward energy and capacity curves in order to yield a meaningful estimate of

value. Thus, PG&E believes the net market value approach is preferable.

5.3.2. Discussion

The calculation of cost competitiveness is perhaps the most contentious

issue in this proceeding. It is also potentially the most complex matter as it is not

based on one formula or a mutually agreed upon methodological approach.

Instead each party has presented different ways in which the cost

competitiveness of the proposed project should be assessed. The methodology

22 DRA Opening Brief at 44.


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and the group of projects selected for comparison are important factors in

determining the Manzana Wind Project’s cost competitiveness. Parties disagree

on the following issues:

Whether to use the LCOE vs. the net market value approach;

Whether the Manzana Wind Project should be compared to other wind projects or to all other renewable projects;

Whether the Manzana Wind Project should be compared to contracts that have been executed and filed at the Commission for approval or to all available offers; and

Whether to consider potential costs if PG&E’s forecasted assumptions are altered.

We find PG&E’s use of the net market value approach deficient for several

reasons. First, the Scoping Memo directed PG&E to compare the Manzana Wind

Project on both the net market value and the LCOE approach. Relying on just

one method is therefore not consistent with the Scoping Memo.

Second, notwithstanding this deficiency, PG&E’s net market value

approach does not provide an apples-to-apples comparison of the Manzana

Wind Project to other projects because it uses different forward curves to

calculate the net market values of various projects. Net market value

calculations that are used to compare projects should use the same forward

curves in order to derive proper valuation results. Therefore, although the

Manzana Wind Project receives a high ranking under PG&E’s net market value

methodology, we cannot determine that it would have the same relative ranking

if the same forward curve was used for all projects. Accordingly, we cannot

conclude that the Manzana Wind Project is cost competitive based on PG&E’s

proposed net market value approach.


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We also disagree with PG&E’s contention that the Manzana Wind Project

should only be compared to selected renewable projects that have been finalized,

namely only current and recent renewable projects from 2009 RPS RFO and from

long term RPS contracts filed within 12 months of the submittal of the Manzana

application. In our view, it is reasonable to include all projects that are

shortlisted and might be selected to meet PG&E’s renewable energy goals in the

comparison because as noted in the Assigned Commissioner’s Ruling of May 19,

2009, if approved, the Manzana Wind Project would displace such projects that

might otherwise be selected. Excluding from the comparison, projects that are

under negotiations under the RPS process but not yet finalized, unnecessarily

limits the scope of our assessment. In addition, for an RPS solicitation, the

Commission evaluates the reasonableness of each proposed RPS PPA price by

comparing the proposed PPA to a variety of factors including the RPS

solicitation results and other proposed RPS projects such as renewable

procurement contracts recently executed and under negotiation. Therefore,

comparing the Manzana Wind Project to other available renewable projects

including those that are subject to negotiations is consistent with the RPS

evaluation process.

Using this set of renewable projects and applying the LCOE approach, we

find that the Manzana Wind Project does not rank as competitively compared to

other types of renewable projects, including other wind projects. In fact, on an

LCOE basis, the Manzana Wind Project ranks significantly lower than other RPS

shortlisted wind projects.23 Moreover, the record shows that Manzana’s ranking

23 See Confidential Figure 6-2, DRA Opening Brief at 64.


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will further deteriorate if PG&E’s original forecasts are changed. While PG&E

argues that its assumptions and forecasts are reasonable, it fails to provide any

analysis on how Manzana’s ranking would change if any one of the underlying

assumptions were changed.

In contrast, DRA provides a more comprehensive comparison of projects

in confidential tables 1 and 2 of its reply brief presenting not only the net market

value and LCOE values for the Manzana Wind Project and all renewable

projects, but also a comparison of Manzana’s ranking under various scenarios.

DRA’s tables show that Manzana’s ranking varies significantly with different

assumptions. Specifically, DRA shows Manzana’s ranking would diminish if

key factors such as project life, transmission requirements, project size, and

project performance were different from PG&E’s assumptions.24 This analysis

suggests that even though Manzana’s ranking may be high in the scenario

presented by PG&E, any delay or change in any one of PG&E’s assumptions

could result in a much lower ranking of the project.

As previously noted, there is a possibility that commercial operation of the

project may be delayed as a result of delays in the transmission construction.

There is also a distinct possibility that the project life will be less than what

PG&E has predicted. Although PG&E claims its forecast of a 30-year project life

is based on a variety of sources such as consultation with industry

manufacturers, independent research of publicly available information and

24 We note that DRA’s tables rely on PG&E’s net market value calculation which uses different forward curves. As argued in the preceding paragraphs, we do not endorse this approach. However, for the purpose of the following argument, this point is not material.


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assumptions regarding project replacements and repairs, there is no technical

data to support the reasonableness of the 30-year life forecast for the turbines

used in the project. We agree with TURN and DRA that the data provided by

PG&E does not support the forecasted project life for the Manzana Wind

Project.25 We are also not convinced by PG&E’s comparison of the Manzana

Wind Project to hydro and fossil plants for the purpose of justifying a 30-year life

projection. As TURN states, “the operation life of a new wind turbine is wholly

unrelated to the history of fossil and hydro plants in California.”26

There is also a possibility that PG&E may not be able to secure the

required lease renewals to operate the facility for the forecasted 30 years. As

DRA points out, some of the land leases for the project will begin to expire before

the end of the assumed 30-year project life.27 While PG&E may intend to

negotiate lease extension with landowners, there is no guarantee that PG&E will

be able to obtain any lease renewals. Accordingly, the project life could be

shorter than what PG&E predicts. If the project operates fewer years than

forecasted, the costs, both in terms of levelized cost and net present value, will be

higher because project costs will be offset by less generation.

Given that transmission delays or a change in project life could have a

significant impact on the Manzana Wind Project’s cost , we find that overall, the

Manzana Wind Project is not cost competitive compared to other resources. We

find that even if the Manzana Wind Project were to operate for thirty years, it

would not be cost competitive because the LCOE of the project could be higher

25 DRA Opening Brief at 49 and TURN Opening Brief at 15. 26 TURN Reply Brief at 19.


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than PG&E’s estimate. As TURN and DRA point out, PG&E’s forecasted cost of

maintaining reliable turbine operation may be understated because it is based on

insufficient data beyond twenty years.28

As TURN states, “in comparison to alternative renewable power options,

the Manzana Wind Project does not offer compelling value to ratepayers even

under a best-case scenario. It ranks in the middle of current PPA offers but poses

far more risks than any of the PPAs to which it is being compared.”29

6. Other Issues

Given that this decision rejects the application, we do not need to address

or make findings on other issues in the Scoping Memo.

7. Comments on Proposed Decision

The proposed decision of Administrative Law Judge (ALJ) Maryam Ebke

in this matter was mailed to the parties in accordance with Section 311 of the

Public Utilities Code and comments were allowed under Rule 14.3 of the

Commission’s Rules of Practice and Procedure. Comments were filed on

________, and reply comments were filed on __________ by ______________.

27 DRA Opening Brief at 51. 28 DRA Opening Brief at 51 and TURN Opening Brief at 16. 29 TURN Opening Brief at 12.


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8. Assignment of Proceeding

President Michael R. Peevey is the assigned Commissioner and

ALJ Maryam Ebke is the assigned ALJ in this proceeding.

Findings of Fact

1. There is no demonstration of need to support this application.

2. PG&E’s proposed interconnection schedule is unrealistic.

3. The operational viability of the Manzana Wind Project may be at risk due

to potential death or take of a California condor, an endangered species under

both State and Federal laws.

4. As a utility-owned generation project, ratepayers will pay a lump sum cost

for the Manzana Wind Project rather than a performance-based cost.

5. As a utility-owned generation project, ratepayers are at risk if the Manzana

Wind Project produces less than expected.

6. PG&E did not compare the cost of the Manzana Wind Project to other

projects as directed by the Scoping Memo.

7. PG&E’s net market value approach does not provide an apples-to-apples

comparisons of project costs.

8. Using the LCOE approach, the Manzana Wind Project does not rank

competitively compared to all other renewable projects, including wind projects.

9. The Manzana Wind Project’s ranking will deteriorate if some of PG&E’s

key assumptions change.

Conclusions of Law

1. It is reasonable to assume delays in project commercial operation date.

2. It is reasonable to assume there will be potential project operation

curtailments in the event that a California condor collides with the project.


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3. It is not reasonable to use PG&E’s proposed net market value approach to

support a conclusion of cost-competitiveness.

4. It is reasonable to compare the Manzana Wind Project to all renewable

projects under the RPS process.

5. It is reasonable to compare the Manzana Wind Project to all available

offers for renewable projects.

6. It is reasonable to consider potential costs if the forecasted assumptions for

the Manzana Wind Project change.

7. The Commission should reject PG&E’s application.

O R D E R

IT IS ORDERED that:

1. The Application of Pacific Gas and Electric Company to approve the

Manzana Wind Project and to issue a Certificate of Public Convenience and

Necessity is denied.

2. Application 09-12-002 is closed.

This order is effective today.

Dated , at San Francisco, California.


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INFORMATION REGARDING SERVICE

I have provided notification of filing to the electronic mail addresses on

the attached service list.

Upon confirmation of this document’s acceptance for filing, I will cause a

Notice of Availability of the filed document to be served upon the service list to

this proceeding by U.S. mail. The service list I will use to serve the Notice of

Availability of the filed document is current as of today’s date.

Dated December 21, 2010, at San Francisco, California.

/s/ JEANNIE CHANG Jeannie Chang

N O T I C E

Parties should notify the Process Office, Public Utilities Commission, 505 Van Ness Avenue, Room 2000, San Francisco, CA 94102, of any change of address to ensure that they continue to receive documents. You must indicate the proceeding number on the service list on which your name appears. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

The Commission’s policy is to schedule hearings (meetings, workshops, etc.) in locations that are accessible to people with disabilities. To verify that a particular location is accessible, call: Calendar Clerk (415) 703-1203. If specialized accommodations for the disabled are needed, e.g., sign language interpreters, those making the arrangements must call the Public Advisor at (415) 703-2074 or TDD# (415) 703-2032 five working days in advance of the event.

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